Why “Phantom Inflation” Is Shaking the Fed’s Playbook
Federal Reserve Governor Stephen Miran recently warned that “phantom inflation” – inflated numbers coming from shelter costs and imputed prices – is pushing the central bank to keep rates higher than the economy truly needs.
Did you know? The Personal Consumption Expenditure (PCE) index showed 2.8% inflation in September, yet Miran argues the “real” rate is just “a hair above” the 2% target once distortions are stripped out.
What the Data Really Says
When analysts remove the housing component from the core PCE, the underlying inflation figure drops to roughly 2.3%. This suggests that traditional measures may be overstating price pressures.
External data sources such as the U.S. Bureau of Labor Statistics also show a slowdown in shelter‑related price growth, reinforcing Miran’s point that “noise” is skewing the official outlook.
Fed’s Divided Path Forward
At the last three FOMC meetings the Fed trimmed rates by 25 basis points, landing at a three‑year low of 3.5‑3.75%. However, the committee is split:
- Governor Miran – wants a 50‑bp cut, citing distorted inflation.
- John Williams (NY Fed) – cautions that the “bar for more cuts is high,” emphasizing resilience heading into 2026.
- Jeff Schmid (Kansas City Fed) – warns that households in the Midwest still feel price pressure, advocating to keep rates steady.
Trump’s Influence on Monetary Policy
President Donald Trump has publicly lambasted Chair Jay Powell as a “stiff” and demanded “at least double” the recent cuts. The looming replacement of Powell—potentially Kevin Hassett or former governor Kevin Warsh—adds political pressure to an already contentious policy board.
Future Trends to Watch
1. A Shift Toward “Core‑Minus‑Housing” Metrics
Analysts expect the Fed to increasingly rely on inflation gauges that exclude shelter and other “imputed” components. This could lead to a more aggressive easing cycle if underlying prices stay subdued.
2. Potential Accelerated Rate Cuts in 2024‑2025
If “phantom” inflation continues to be discounted, the Fed may deliver a series of larger cuts (50 bp or more) to prevent unnecessary job losses—a scenario Miran warned against.
3. Political Turnover at the Top
A new Fed chair aligned with the Trump administration could prioritize growth over inflation control, reshaping the Fed’s “dual mandate” balance.
4. Market Reaction to Revised Inflation Reporting
Bond yields and equity valuations are highly sensitive to rate expectations. A credible move to a “core‑minus‑housing” framework may tighten spreads, boost risk‑appetite, and lower Treasury yields.
Pro Tips for Investors
- Track alternative inflation indexes such as the Core CPI excluding shelter for early signals of policy shifts.
- Watch Fed leadership changes – a new chair can accelerate or stall rate cuts, impacting everything from mortgages to corporate borrowing costs.
- Diversify into sectors less sensitive to interest rates, like technology or consumer staples, if the Fed’s stance becomes more dovish.
Frequently Asked Questions
- What is “phantom inflation”?
- It refers to price increases that stem from accounting distortions—especially housing costs and imputed asset values—rather than genuine consumer demand.
- Why does removing shelter from inflation calculations matter?
- Shelter prices are volatile and can be influenced by factors like mortgage interest rates, which themselves are policy‑driven. Stripping them out yields a clearer view of underlying price pressure.
- Will the Fed cut rates more aggressively if “phantom inflation” is confirmed?
- Most likely. If policymakers accept that core inflation is already near target, they have more room to lower rates without risking a price surge.
- How could a new Fed chair change monetary policy?
- A chair aligned with the executive branch might prioritize faster rate cuts to support growth, while a more independent chair would safeguard against inflation overruns.
What’s your take on the Fed’s next move? Join the discussion below, explore our latest rate‑forecast analysis, and subscribe to the White House Watch newsletter for insider updates.
